The Department of Conservation and Natural Resources (DCNR) is investigating a few Marcellus Shale gas companies to see whether or not they are cheating the state on royalty money.
The DCNR is responsible for managing gas drilling on state forest land. The organization currently has 117 active leases with 18 different companies.
DCNR’s Chief Counsel Richard Morrison commented on the investigation:
We’re looking at the accuracy of payments … It’s an internal process. It’s complicated and will take some time, but we’re proactively and aggressively pursuing those.
Morrison did not specify which companies the DCNR is looking into or whether or not the agency has plans to file any lawsuits. According to Morrison, the issues only involve a few operators. Several of the problems revolve around companies withholding post-production costs from royalty payments. The DCNR brings in an estimated $10 million per month in royalties.
Post production costs consist of the expenses involved in processing and transporting natural gas from the well to the market. It can also include dehydration, compression and pipeline transport. In some cases, leases allow the gas company to split the expenses with property owners.
What seems to be occurring is companies are deducting the costs from the commonwealth’s royalty checks, which is something the state of Pennsylvania doesn’t allow. Companies are responsible for all production costs and the state’s leases are supposed to prohibit companies from subtracting the costs.
The costs have led to many lawsuits and complaints from landowners who claim a few companies are charging them severely high fees and cheating them out of royalty money. One company that was been accused in several complaints is Chesapeake Energy.
According to Arianne Proctor, a member of DCNR’s mineral division, the department has always thoroughly checked the data received from oil and gas companies that are drilling on public land. There are eight geologists at the DCNR who are involved in verifying proper royalties and Penn State is contracted to analyze gas volumes.
Proctor commented on the issues that are occurring:
There have been instances throughout the years where this has happened … But more often than not, payments have been accurate and where there were issues the operator was very quick to make things right with the Commonwealth.
The DCNR has amped up its auditing efforts and has hired a new accountant to oversee royalty payments. The agency is also in the process of searching for a new external auditing firm to confirm the gas pricing data is accurate.